In the last few weeks, it seems that everyone has become convinced that the Software-as-a-Service (SaaS) sector is in trouble, thanks to a sudden decline in market valuations of SaaS companies like LinkedIn, Workday and Salesforce.
Those concerns aren’t without merit: In one week, the combined stock values of those three companies plunged by $22 billion, and in the first 9 weeks of 2016, the Bessemer Venture Partners SaaS index (which contains 38 cloud-computing companies) lost a mind-boggling $125 billion in value.
It would be easy to draw the conclusion that the SaaS industry is in the middle of a decline towards obsolescence, but it’s important to remember that the recent struggles of the tech juggernauts represented on the NASDAQ exchange aren’t representative of the industry as a whole.
In fact, a deeper look at the SaaS market reveals a far more positive perspective on the future of the industry. We host a tremendous number of SaaS companies, providing them with the capabilities and infrastructure they need to scale in accordance with market realities, and their numbers are expanding more rapidly than ever before.
These are often younger, upstart companies, that respond more nimbly to changing market conditions. They want both upward and downward scalability, so they can back down their infrastructure costs in lean times, and rapidly scale up with increasing demand.
What I’ve learned from our clients is that the ability to flexibly adjust to changing market conditions is the best way to plan for a growth pattern that no longer proceeds in a linear fashion, but rather in fits and starts. In fact, while I’m convinced that more established companies like LinkedIn have made valuable contributions to the SaaS industry, it’s undeniable that many have struggled to react quickly and efficiently to a changing technological landscape, unlike their smaller, more agile peers.
Take AFAS Software, a LeaseWeb client, which managed to fill 38 dedicated servers with more than 600 customers in the first three months alone, far exceeding their growth expectations. Another company, ooVoo, is the world’s fastest growing and largest independent video chat provider. Beginning in 2007, ooVoo has acquired more than 100 million registered users, and we’ve had to scale up right alongside them.
The SaaS community gathered in San Francisco this month for the second-annual SaaStr Annual. Led by renowned SaaS venture capitalist Jason Lemkin, it brought together SaaS start-ups, partners and VCs from around the globe. With more than 3,500 executives in attendance, SaaStr allowed attendees to network and learn from well-known SaaS founders, executives and investors in a hospitable environment that fostered discussion and collaboration.
Instead of using large, inflexible SaaS companies as the leading indicator of industry health, I believe that the tangible enthusiasm I encountered at SaaStr is a much more accurate bellwether of the state of the industry, because investors and industry leads have good reason to be excited: Despite market adjustments for some companies, it is predicted that the global SaaS market is progressing at a compound annual growth rate of 27.9 percent between 2015 and 2022, and is expected to reach a total market valuation of more than $164 billion by the end of 2022.
In the context of a global economy, the growth of the SaaS sector forms a compelling picture of an industry that is making tremendous progress, bringing new capabilities to a wider variety of consumers and companies alike. If this extraordinary growth is to continue, the key to the future of SaaS is the ability to respond to a dynamic global economy, a future for which I believe the SaaS industry is well prepared.